The informal sector urgently needs cash and debt relief

Published on 24 April 2020

Philip Mader

Research Fellow

The Covid-19 pandemic and related physical distancing measures hit the poorest hardest. This is a universal issue. Many in the global North live one paycheck away from catastrophe, many in the South live a day’s work away from hunger and starvation. The haunting images of laborers fleeing India’s metropolitan centres showcase the extreme fragility of informal livelihoods. Yet two financial burdens which afflict the informal sector remain mostly hidden: the heavy debt loads they carry and the fear of losing the ability to make cash payments.

‘balouriarajesh’, 863 image (CC BY-NC-ND 2.0)

Firstly, pressures on low-income informal sector workers to continue servicing debts are making bad situations worse. Low-income families and informal workers already shoulder significant debt burdens in ‘normal’ times, which they have usually accrued for survival needs, emergencies, and perilous attempts to get ahead or stay afloat with microenterprise. Their financial net worth is often negative, and they risk falling further into debt more quickly, they struggle more than others to get out, and their debts are expensive. Secondly, informal sector workers and low-income families need to be able to make and receive cash payments. The unfounded belief that cash could spread the virus is making their survival even harder.

Relief efforts missing the mark

Many of the financial and macroeconomic responses by governments to Covid-19, such as tax relief or loan payment holidays, have failed to reach those most in need. For instance, in late March 2020, the Reserve Bank of India announced a payment moratorium on all loans until 31 May. Like most other debt moratoria, this is merely a postponement of all payments, not a cancellation. The RBI further clarified that “interest shall continue to accrue on the outstanding portion of the term loans during the moratorium”, which will leave the lowest-income borrowers, who pay the highest interest rates, worse-off when the moratorium ends.

Worse yet, the moratorium is optional, not mandatory. The Indian microfinance industry body Sa-Dhan announced that its member institutions would grant the moratorium to many of their borrowers, but also complained that many larger banks, from which the microfinance institutions had borrowed their capital, were continuing to demand payments. This means that, in reality, Indian microfinance institutions are unlikely to abide by the moratorium. Many microfinance borrowers will remain under repayment pressure.

Some steps taken by other governments to mitigate debts under Covid are also ambiguous. In March, Cambodia gave additional loans worth US$500 to 600 million to microfinance institutions, to ensure their liquidity and enable them to expand their lending at commercial rates. Yet many poor Cambodians are already deeply indebted, and additional easy money is likely to exacerbate the brewing nationwide debt crisis.

Meanwhile, in Morocco, the Committee for the Abolition of Illegitimate Debt (CADTM) called on borrowers to mobilise against microfinance institutions unless their loan dues were suspended for six months. It highlighted the injustice that a recent Moroccan government initiative, which deferred loan payments for those who lost jobs due to Covid-19, did not extend to microfinance borrowers.

The dangers of cash anxiety

An even more insidious threat for the informal sector is growing anxiety about cash payments. Shops and traders in many places have begun to refuse cash payments. But small businesses and low-income households everywhere, most of all in the global South, rely on cash to earn a living and pay their expenses. Fears about cash being contaminated by Coronavirus, which lack scientific evidence, threaten to close down vital payment channels and stigmatise paper money and its users as dirty.

Recently, the World Health Organization (WHO) was forced to clarify “We did NOT say that cash was transmitting coronavirus”, after a widely picked-up article in the UK newspaper The Telegraph misrepresented a WHO statement. The WHO does not promote contactless payments. Its message was simply to “wash your hands” after any kind of transaction. (From what is currently known, the SARS-CoV-2 virus stays longer on plastic and metal surfaces than on paper.)

The reasons why poor people use cash include the technological barriers of digital payment systems, literacy issues, convenience, habit, and the high transaction costs of many digital payment systems. Even lobby groups for the electronic payments industry, such as the Better Than Cash Alliance, have refrained from portraying cash as a health risk, even while they have seized the moment to promote digital payments as a response to Covid-19. For instance, they argue, digitally paying wages for health workers would help health systems to keep running.

While digital payments can of course be useful in such ways, it is vital that they remain part of a plurality of payment rails. Digitising all payments would discriminate and exclude those whose livelihoods are already most under threat. The devastating effect of sudden disruptions to cash payments, as witnessed in India’s calamitous “demonetisation” experiment in 2016, was that many people lost the ability to pay for basic services. The economy ground to halt. Civil society organisations reported a spike in domestic violence, even deaths.

The most vulnerable need radical, comprehensive solutions

Many of the rapid-fire efforts to rescue “the economy” from the pandemic favour middle classes and larger businesses, whether by accident or design, but the poor and the informal sector are left out, and may even be have to foot the bill. Examples include Morocco’s poorly targeted loan suspension scheme; Cambodia’s stimulus package that reaches poor people only via microfinance lenders; and, in the global North, policies such as the UK’s three-month mortgage moratorium, which helps aspiring homeowners while excluding renters.

To address the pressing financial needs of the informal sector and the poor, far more radical, progressive, and comprehensive approaches are needed, for instance a Universal Basic Income or wide-reaching “helicopter money”. These must also be offered as genuine “cash” transfers, to reach the most vulnerable. Binding, interest-free debt moratoria for the crisis’ duration would ensure loan payments do not endanger families’ survival. Without such measures from above, disruptive forms of progressive self-help from below, such as rent strikes and organised debt defiance, are likely to follow.




The views expressed in this opinion piece are those of the author/s and do not necessarily reflect the views or policies of IDS.


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